IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

FTSE 5323 +3

DAX 6252 -12

CAC 3027 +10

IBEX 6090 0

DOW 12354 -39

NAS 2516 -9

S&P 1303 -7

Oil 86.49

Gold 1557

Across Asia, trading has been dominated by China’s PMI numbers, with volatility continuing to be the dominant theme. China's official manufacturing PMI data missed expectations, falling to 50.4 in May versus 51.5 expected by economists. The initial reaction was fairly negative, but then in typical fashion, we saw a recovery as the weak data gives rise to policy action speculation. Yesterday, generally softer-than-expected US data served as a reminder that not all the risks are confined to Europe. The May ADP private payrolls print came in at 133,000 (versus 145,000 expected); initial claims rose 10,000 to 383,000 (versus 369,000 anticipated), and the Chicago PMI fell to 52.7. Reports that the IMF has started discussing contingency plans for a rescue loan for Spain gave markets temporary relief, but this didn’t last long as Spain's Finance Minister denied the claims. Overall, it was a tough month for markets all round, with the S&P finishing May down 6.3%, Spain 13% lower and oil slumping 17%. This was the S&P’s biggest monthly decline since September. The Dow had 17 down days in May, a feat that last occurred in 1956.

Regional markets are mixed with some strength in China, but there has been weakness in Japan and Australia. The Hang Seng is 0.2% higher and the Shanghai Composite is up 0.4%. Japan’s Nikkei is 1.3% lower and underperforming the region, as a stronger yen weighs on sentiment. The ASX 200 is down 0.4% after erasing a loss of over 1% earlier. European markets are facing a flat to mildly positive open, but US markets are facing a weaker open. There is quite a lot of data due out later today with the non-farm employment change perhaps the most significant one. Many analysts are expecting a soft employment report for May. This is because Household perception of job availability, online help-wanted advertising, the ADP employment report, and high-frequency survey measures of activity in the manufacturing sector have all shown weakness. Consensus is for a 151,000 gain in non-farm payrolls, a flat 8.1% unemployment rate, and a 0.2% increase in average hourly earnings. In Europe, manufacturing PMI and unemployment rates will shed further light on the dismal state of its economy.

After today’s Australian and Chinese PMI data, AUD/USD fell to a low of 0.9648, 13 pips below the November 2011 low. We see this as critical support for the pair, and a daily close would suggest it could fall further, with the October 2011 extreme lows of 0.9386 the potential target. We feel the path of least resistance is lower, although a close tonight above 0.9773 (the 50% retracement of the recent sell-off) would suggest further short covering. Given Thursday’s high was at 09770, it would mean the pair could have formed a bullish key day reversal at the trend low. This may suggest the pair is destined to stage a descent reversal in the short term.

The Aussie market has had quite a volatile session as headline risk remains rampant in global markets. After printing a low of 4030.4, the local market is now well off its lows, with the financials leading the recovery. Three of the four big banks are in positive territory with ANZ and Westpac rising around 1.5% each. It has been a good day for high-yielding stocks all round, with Telstra also enjoying a solid 2.3% gain after reports suggesting the telco giant has walked away from talks to acquire James Packer’s stake in Consolidated Media emerged. CMJ is down 1.5% for the day. Resources have struggled yet again, with all the big miners losing ground. At current levels (4064), the Aussie market is up around 0.9% for the week, which is not a bad result considering some of the carnage we have seen in recent days. Focus now turns to the RBA as a growing number of analysts call for a 25 basis point rate cut on Tuesday.

Kind regards,

Stan Shamu

Market Strategist

IG Markets
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